PHH appeal a test of CFPB authority

The U.S. Federal Court of Appeals for the D.C. circuit has halted a Consumer Financial Protection Bureau enforcement action against PHH Mortgage. The CFPB accuses PHH of taking kickbacks from mortgage insurers in violation of the Real Estate Settlement Procedures Act.

PHH filed for a stay of final action as part of its appeal of the CFPB's $109 million enforcement ruling. The case is the first appeal of a CFPB administrative action.

Originally, an administrative law judge had issued a "recommended decision" holding that PHH had violated RESPA and suggesting a $6.5 million penalty. Both parties appealed the decision, but under the framework put in place by the Dodd-Frank Act, the CFPB director hears all appeals and issues final rulings. When Director Richard Cordray increased the penalty, PHH appealed.

There are two significant prongs to the PHH case. First, Cordray's ruling may clash with almost 20 years of previous RESPA interpretation by the Department of Housing and Urban Development and the clear language of the statute. PHH said RESPA exempts certain payments and serves as a sufficient defense from the kickback charges, citing a corroborating 1997 HUD letter. Cordray's interpretation of RESPA "cannot be applied retroactively to punish conduct undertaken by petitioners based on explicit agency advice expressly approving that conduct," it said.

The other prong of PHH's appeal turns on RESPA's three-year statute of limitations. Cordray's ruling claims that limit only applies to criminal actions, not administrative ones. According to an amicus brief, RESPA is just one of 19 statutes enforced by the CFPB. Under the CFPB's analysis, the brief said, statutes of limitations in those laws also would not apply in the administrative context. If the CFPB prevails, the agency could potentially challenge an array of practices under other laws or authority based on alleged violations going back several years, even before 2011, the effective date of its enforcement authority.

Scholars shed light on payday loan debate

An article published on the blog for the Federal Reserve Bank of New York analyzes the recent CFPB attention given to payday loans. The authors conclude that most common objections do not hold up under scrutiny.

The first complaint against payday lenders is their high prices. The typical brick-and-mortar payday lender charges an annual interest rate of 391 percent, a high but not unfair price, according to the authors. They cite a recent study indicating that strong competition among payday lenders actually tends to keep prices down. The higher rate is also in keeping with payday lenders' risk profile, according to an FDIC report which concluded the combination of fixed operating costs and loan loss rates justify a large part of the high APRs

Another complaint leveled against payday loans is that the fees increase exponentially when consumers roll their loans over from month to month. However, payday lenders do not charge refinancing or rollover fees, as with mortgages, and the interest doesn't compound. Interest on payday loans .s actually expressed linearly, not exponentially.

Finally, payday lenders have been accused of preying upon minority borrowers. It is well known that payday lenders tend to locate in lower income, minority communities. However, according to a recent Federal Reserve study, they do so because of their financial characteristics and not their racial composition. Only people who are having financial problems and can't borrow from mainstream lenders demand payday credit. Payday lenders locate where such people live or work.

The tendency for payday loans to be taken out, repaid, and taken out again within 14 days requires additional scrutiny, the authors said. While 20 percent of new payday loans are rolled over six times such that borrowers wind up paying more in fees than the original principal, there is no evidence of deception. If chronic rollovers reflect ill-advised consumer choices, capping rollovers could diminish the behavior, the authors suggest.